Company-Centric B2B

1
Chapter 6

• Company-Centric B2B
• and E-Procurement

2
US B2C Market Size
3
US B2B Market Size
4
US EC Market Growth
Billion US
Sources eMarketer, February 2002Source
eMarketer, April 2003
5
General Motors B2B Initiatives

• The Problem
• Because the automotive industry is very
  competitive, GM is always looking for ways to
  improve its effectiveness
• GM expects to custom-build the majority of its
  cars by 2005
• The company hopes to use the system to save
  billions of dollars by reducing its inventory of
  finished cars
• (why inventory??)

6
General Motors B2B Initiatives (cont.)

• GM sells custom-designed cars online through its
  dealers sites avoiding channel conflict (think
  about Dell vs. HP)
• This collaboration requires sharing information
  with dealers and suppliers
• Operational problems
• disposing of manufacturing machines that are no
  longer sufficiently productive
• procurement of commodity products

7
General Motors B2B Initiatives (cont.)

• The Solution
• GM established an extranet infrastructure called
  ANX (Automotive Network eXchange)
• ANX has evolved into the consortium exchange
  covisint.com supported by other automakers

8
General Motors B2B Initiatives (cont.)

• Capital assets problem
• GM implemented its own electronic market from
  which forward auctions are conducted
• Resource procurement problem
• GM automated the bidding process using reverse
  auctions on its e-procurement site

9
General Motors B2B Initiatives (cont.)

• The Results
• Within just 89 minutes after the first forward
  auction opened, eight stamping presses were sold
  for 1.8 million
• Off-line method, a similar item would have sold
  for less than half of its online price, and the
  process would have taken 4 to 6 weeks

10
General Motors B2B Initiatives (cont.)

• Online reverse auction prices are significantly
  lower than the prices the company had been paying
  for the same items previously negotiated by
  manual tendering
• Administrative costs per order have been reduced
  by 40
• Most GM dealers and thousands of GMs suppliers
  are connected on a common extranet platform

11
General Motors B2B Initiatives (cont.)

• What can we learn
• Involvement of a large company in three EC
  activities
• connecting with dealers and suppliers through an
  extranet
• electronically auctioning used equipment to
  customers
• conducting purchasing via electronic bidding

12
General Motors B2B Initiatives (cont.)

• B2B transactions
• Company can be a seller, offering goods or
  services to many corporate buyers
• Company can be a buyer, seeking goods or services
  from many corporate sellers (suppliers)
• A company can
• employ auctions
• use electronic catalogs
• use other market mechanisms

13
Business activities

• Material Flow
• Cash Flow
• Business Flow
• Information Flow

14
Business activities 2
Information Flow Information processing,
Catalogs, Order Processing
Business Flow Promotion, Price negotiation,
encumbrance, Transfer of Ownership
Buyer
Seller
Cash Flow Payment, Financing, Risk management
Material Flow Physical movement of goods,
Physical ownership
15
Coupling OR uncoupling ?

• Coupling OR uncoupling?
• Value networks
• tight coupling with up-stream and down-stream
• Dynamic market
• E-Marketplaces
• What are the market forces underlying these
  development?
• Vertical vs. Horizontal visibilities
• Special designed parts vs. Commodities

16
Procurement Market and Product Characteristics
Product Characteristics
Low Price High Price
Many small transactions A (MRO) B eProcurement
Few Big transactions C D Negotiations by Lawyers
Transaction Chars.
MRO Maintenance, Repair and Operations
17
Governance Mechanisms
Specificity of Investments
General Mixed Specific
Some times
Frequent ??
Transaction Frequency
Fixed Networks
Market
18
Fixed networks vs Markets
Internal Value Chain
Dynamic Market
Industrial Value Network
19
Fixed networks vs Markets
Value Network Dynamic Market
Relationships Values added thru internal relationships Values added thru external relationships
Time Span Long term Short term
Commitment High Low
Investment per Relationship High Low
Number of Relationship Few Many
20
Dynamic Market

• Dynamic Specification, quantity and quality
• Dynamic Supply and demand ? Price fluctuations
• Dynamic Pricing
• Electronic Market and Electronic Marketplaces

21
Fixed value network Supply Chain

• Virtual Hierarchy
• Characteristics
• Low transaction costs
• Low agency costs

High
Hierarchy Undesirable
Best of both World Market
Agency Cost
Low
Transaction Cost
High
22
Fixed value network Supply Chain

• Virtual Hierarchy
• Low transaction costs
• Low agency costs

High
Hierarchy Undesirable
Best of both World Market
Agency Cost
Low
Transaction Cost
High
23

• This book treats B2B EC as eMarketPlaces

24
Concepts, Characteristics, and Models of B2B EC

• Basic B2B concepts
• Business-to-business e-commerce (B2B EC)
  Transactions between businesses conducted
  electronically over the Internet, extranets,
  intranets, or private networks also known as
  eB2B (electronic B2B) or just B2B

25
Concepts, Characteristics, and Models of B2B EC
(cont.)

• B2B characteristics
• Parties to the transaction
• Online intermediary An online third party that
  brokers a transaction online between a buyer and
  a seller can be virtual or click-and-mortar

26
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Types of transactions
• Spot buying The purchase of goods and services
  as they are needed, usually at prevailing market
  prices
• Strategic sourcing Purchases involving long-term
  contracts that are usually based on private
  negotiations between sellers and buyers

27
B2B Characteristics (cont.)

• Types of materials
• Direct materials Materials used in the
  production of a product (e.g., steel in a car or
  paper in a book)
• Indirect materials Materials used to support
  production (e.g., office supplies or light bulbs)
• MROs (maintenance, repairs, and operations)
  Indirect materials used in activities that
  support production

28
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Direction of trade
• Vertical marketplaces Markets that deal with one
  industry or industry segment (e.g., steel,
  chemicals)
• Horizontal marketplaces Markets that concentrate
  on a service, material, or a product that is used
  in all types of industries (e.g., office
  supplies, PCs)

29
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Basic B2B transaction types
• Sell-side
• One seller to many buyers
• Buy-side
• One buyer from many sellers
• Exchanges
• Many sellers to many buyers
• Collaborative commerce
• Communication and sharing of information,
  design, and planning among business partners

30
Concepts, Characteristics, and Models of B2B EC
(cont.)
31
Concepts, Characteristics, and Models of B2B EC
(cont.)

• One-to-many and many-to-one company-centric
  transactions
• Company-centric EC E-commerce that focuses on a
  single companys buying needs (many-to-one, or
  buy-side) or selling needs (one-to-many, or
  sell-side)
• Private e-marketplaces Markets in which the
  individual sell-side or buy side company has
  complete control over participation in the
  selling or buying transaction

32
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Many-to-many exchanges
• Exchanges (trading communities or trading
  exchanges) Many-to-many e-marketplaces, usually
  owned and run by a third party or a consortium,
  in which many buyers and many sellers meet
  electronically to trade with each other also
  called trading communities or trading exchanges
• Public e-marketplaces Third-party exchanges that
  are open to all interested parties (sellers and
  buyers)

33
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Collaborative commerce
• Communication, design, planning, and information
  sharing among business partners

34
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Supply chain relationships in B2B
• Supply chain process consists of a number of
  interrelated subprocesses and roles
• acquisition of materials from suppliers
• processing of a product or service
• packaging it and moving it to distributors and
  retailers
• purchase of a product by the end consumer

35
Concepts, Characteristics, and Models of B2B EC
(cont.)

• B2B private e-marketplace provides a company with
  high supply chain power and high capabilities for
  online interactions
• Joining a public e-marketplace provides a
  business with high buying and selling
  capabilities, but will result in low supply chain
  power
• Companies that choose an intermediary to do their
  buying and selling will be low on both supply
  chain power and buying/selling capabilities

36
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Virtual services industries in B2B
• Travel services
• Real estate
• Financial services
• Online stock trading
• Online financing
• Other online services

37
Concepts, Characteristics, and Models of B2B EC
(cont.)

• Benefits of B2B
• Eliminates paper and reduces administrative
  costs.
• Expedites cycle time
• Lowers search costs and time for buyers
• Increases productivity of employees dealing with
  buying and/or selling
• Reduces errors and improves quality of services.
• Reduces inventory levels and costs
• Increases production flexibility, permitting
  just-in-time delivery
• Facilitates mass customization
• Increases opportunities for collaboration

38
One-to-Many Sell-Side Marketplaces

• Sell-side e-marketplace A Web-based marketplace
  in which one company sells to many business
  buyers from e-catalogs or auctions, frequently
  over an extranet
• Three major direct sales methods
• selling from electronic catalogs
• selling via forward auctions
• one-to-one selling

39
One-to-Many Sell-Side Marketplaces (cont.)
40
One-to-Many Sell-Side Marketplaces (cont.)

• B2B sellers
• click-and-mortar manufacturers or
  intermediaries, usually distributors or
  wholesalers
• Customer service
• online sellers can provide sophisticated
  customer services

41
One-to-Many Sell-Side Marketplaces (cont.)

• Configuration and customization
• customize products
• get price quotes
• submit orders

42
One-to-Many Sell-Side Marketplaces (cont.)

• Major benefits of direct sales are
• Lower order-processing costs and less paperwork
• A faster ordering cycle
• Fewer errors in ordering and product
  configuration
• Lower search costs of products for buyers
• Lower search costs of finding buyers for sellers
• Sellers can advertise and communicate online
• Lower logistics costs
• Ability to offer different catalogs and prices to
  different customers

43
Selling via Auctions

• Using auctions on the sell side
• Revenue generation
• Cost savings
• Increased page views
• Member acquisition and retention

44
Selling via Auctions (cont.)

• Selling from the companys own site
• The company will have to pay for infrastructure
  and operate and maintain the auction site
• If then company already has an electronic
  marketplace for selling from e-catalogs, the
  additional cost may not be too high

45
Selling via Auctions (cont.)

• Using intermediaries
• An intermediary may conduct private auctions for
  a seller, either from the intermediarys or the
  sellers site
• A company may choose to conduct auctions in a
  public marketplace, using a third-party hosting
  company

46
Using Intermediaries in Auctions (cont.)

• Benefits of using intermediaries
• no additional resources are required
• auction set up to show the branding (company
  name) of the merchant rather than the
  intermediarys name
• intermediary does the work of
• controlling data on Web traffic, page views, and
  member registration
• setting all the auction parameters (transaction
  fee structure, user interface, and reports)
• integrating the information flow and logistics

47
Sell-Side Cases

• Direct sales Cisco Systems
• Worlds leading producer of routers, switches,
  and network interconnection services
• Ciscos portal began with technical support for
  customers and developed into one of the worlds
  largest direct sales EC sites

48
Sell-Side Cases (cont.)

• Customer service
• Applications offered
• software downloads
• defect tracking
• technical advice
• 85 of customer service inquiries and 95 of
  software updates are delivered online
• Online ordering by customers
• Provides online pricing and configuration tools
  to customers
• 98 are now placed through Cisco Connection
  Online (CCO)
• Order status

49
Sell-Side Cases (cont.)

• Benefits
• Reduced operating costs for order taking
• Enhanced technical support and customer service
• Reduced technical support staff cost
• Reduced software distribution costs
• Faster service

50
Sell-Side Cases (cont.)

• Sales through an intermediary Marshall
  Industries (now Avnet.com)
• large distributor of electronics components
• known for its innovative use of information
  technologies and the Web

51
Sell-Side Cases (cont.)

• Marshall Industries EC initiatives
• MarshallNet
• intranet that supports salespeople in the field
  via wireless devices and portable PCs
• Marshall on the Internet (portal)
• B2B portal for customers that offers
  information, ordering, and tracking capabilities
• Strategic European Internet
• strategic partner in Europe that offers
  MarshallNet in 17 languages

52
Sell-Side Cases (cont.)

• Marshal Industries
• Electronic Design Center
• online configuration tool provides technical
  specifications offers simulation capabilities
  for making virtual components
• PartnerNet
• customized Web pages for major customers and
  suppliers
• NetSeminar Education and News Portal
• online training tool brings suppliers and
  customers together for live interactions

53
Sell-Side Cases (cont.)

• B2B intermediary Boeings parts marketplace
• Worlds largest maker of airplanes for commercial
  and military customers
• Major goal of Boeings intermediary parts market,
  called PART is supporting customers maintenance
  needs as a customer service

54
Sell-Side Cases (cont.)

• Online strategy is to provide a single point of
  online access through which airlines (buyers) and
  the maintenance and parts providers (suppliers)
  can access data about the parts they need
• Began using traditional EDI

55
Sell-Side Cases (cont.)

• 1996, Boeing introduced its PART page on the
  Internet
• Customers around the world could
• check parts availability and pricing
• order parts
• track order status
• Less than a year later, about 50 percent of
  Boeings customers used PART for parts orders and
  customer service inquiries

56
Sell-Side Cases (cont.)

• Boeing OnLine Data (BOLD) enables mechanics and
  technicians at the airport to access the
  technical manuals they need for repairs
• These manuals are now available in digital form,
  and mechanics and technicians can access them via
  wireline or wireless devices

57
One-from-Many Buy-Side Marketplaces and
E-Procurement

• Buy-side e-marketplace A corporate-based
  acquisition site that uses reverse auctions,
  negotiations, group purchasing, or any other
  e-procurement method

58
One-from-Many Buy-Side Marketplaces and
E-Procurement (cont.)

• Procurement methods
• Buy from manufacturers, wholesalers, or retailers
  from their catalogs, and possibly by negotiation
• Buy from the catalog of an intermediary that
  aggregates sellers catalogs or buy at industrial
  malls
• Buy from an internal buyers catalog in which
  company-approved vendors catalogs, including
  agreed upon prices, are aggregated

59
One-from-Many Buy-Side Marketplaces and
E-Procurement (cont.)

• Conduct bidding or tendering (a reverse auction)
  in a system where suppliers compete against each
  other
• Buy at private or public auction sites in which
  the organization participates as one of the
  buyers
• Join a group-purchasing system that aggregates
  participants demand, creating a large volume
• Collaborate with suppliers to share information
  about sales and inventory, so as to reduce
  inventory and stock-outs and enhance just-in-time
  delivery

60
One-from-Many Buy-Side Marketplaces and
E-Procurement (cont.)

• Inefficiencies in traditional procurement
  management
• Procurement management The coordination of all
  the activities relating to purchasing goods and
  services needed to accomplish the mission of an
  organization
• Maverick buying Unplanned purchases of items
  needed quickly, often at non-pre-negotiated,
  higher prices

61
One-from-Many Buy-Side Marketplaces and
E-Procurement (cont.)

• e-procurement The electronic acquisition of
  goods and services for organizations

62
Benefits of E-Procurement

• Benefits of e-procurement
• Increasing the productivity of purchasing agents
• Lowering purchase prices through product
  standardization and consolidation of purchases
• Improving information flow and management

63
Benefits of E-Procurement (cont.)

• Minimizing the purchases made from noncontract
  vendors. Improving the payment process
• Establishing efficient, collaborative supplier
  relations
• Ensuring delivery on time, every time
• Reducing the skill requirements and training
  needs of purchasing agents
• Reducing the number of suppliers
• Streamlining the purchasing process, making it
  simple and fast

64
Benefits of E-Procurement (cont.)

• Reducing the administrative processing cost per
  order
• Improved sourcing
• Integrating the procurement process with
  budgetary control in an efficient and effective
  way
• Minimizing human errors in the buying or shipping
  process
• Monitoring and regulating buying behavior

65
Implementing E-Procurement

• Implementing e-procurementmajor e-procurement
  implementation issues
• Fitting e-procurement into the company EC
  strategy
• Reviewing and changing the procurement process
  itself
• Providing interfaces between
• e-procurement with integrated enterprisewide
  information systems such as ERP or supply chain
  management (SCM)

66
Implementing E-Procurement (cont.)

• Coordinating the buyers information system with
  that of the sellers sellers have many potential
  buyers
• Consolidating the number of regular suppliers to
  a minimum and assuring integration with their
  information systems, and if possible with their
  business processes

67
Buy-Side E-Marketplaces Reverse Auctions

• One of the major methods of e-procurement is
  through reverse auctions (tendering or bidding
  model)
• request for quote (RFQ) The invitation to
  participate in a tendering (bidding) system
• The reverse auction method is the most common
  model for large MRO purchases as it provides
  considerable savings

68
Reverse Auctions (cont.)

• Conducting reverse auctions
• Thousands of companies use the reverse auction
  model
• They may be administered from a companys Web
  site or from an intermediarys site
• The bidding process may last a day or more
• Bidders may bid only once, but bidders can
  usually view the lowest bid and rebid several
  times

69
Reverse AuctionsA Pioneer General Electrics TPN

• Procurement revolution at GETrading Process
  Network (TPN) Post
• With this online system, the sourcing department
  received the requisitions electronically from its
  internal customers and sent off a bid package to
  suppliers around the world via the Internet
• The system automatically pulled the correct
  drawings and attached them to the electronic
  requisition forms

70
Reverse AuctionsA Pioneer General Electrics
TPN (cont.)

• Benefits of TPN
• labor involved in the procurement process
  declined by 30
• cut by 50 staff involved in the procurement
  process and redeployed those workers into other
  jobs
• reduced the number of days to complete a contract
  by half
• invoices were automatically reconciled with
  purchase orders
• procurement departments around the world were
  able to share information about their best
  suppliers

71
Reverse Auction The Process
72
Reverse Auctions A Pioneer General Electrics
TPN (cont.)

• GXS Express Marketplaces is an expanded system
  that makes it a public posting place for other
  buyers
• Suppliers gain instant access to global buyers
• Dramatically improve the productivity of their
  bidding and sales activities
• Increased sales volume
• Expanded market reach and ability to find new
  buyers
• Lower administration costs
• Shorter requisition cycle time
• Improved sales staff productivity
• Streamlined bidding process

73
Other E-Procurement Methods

• Internal marketplace The aggregated catalogs of
  all approved suppliers combined into a single
  internal electronic catalog

74
Internal Marketplace (cont.)

• Benefits of internal marketplaces
• corporate buyers quickly find what they want,
  check availability and delivery times, and
  complete an electronic requisition form
• reduce number of regular suppliers
• easy financial controls

75
Internal Marketplace Desktop Purchasing

• Desktop purchasing Direct purchasing from
  internal marketplaces without the approval of
  supervisors and without intervention of a
  procurement department
• Desktop purchasing systems Software that
  automates and supports purchasing operations for
  nonpurchasing professionals and casual end users

76
Other E-Procurement Methods (cont.)
77
Other E-Procurement Methods (cont.)

• Industrial malls
• Distributors that aggregate products from
  hundreds or thousands of suppliers in one place
• Horizontalcarrying MRO (nonproduction) materials
  for use in a variety of industries
• Verticalcarrying products used by one industry
  but at various segments of the supply chain

78
Other E-Procurement Methods (cont.)

• E-auctions
• sellers are increasingly motivated to sell
  surpluses and even regular products via auctions
• e-auctions provide an opportunity to buyers to
  find inexpensive or unique items fairly quickly

79
Other E-Procurement Methods (cont.)

• Group purchasing The aggregation of orders from
  several buyers into volume purchases so that
  better prices can be negotiated

80
Other E-Procurement Methods (cont.)

• Internal aggregationcompanywide orders are
  aggregated using the Web and replenished
  automatically
• External aggregationprovide SMEs with better
  prices, selection, and services by aggregating
  demand online and then either negotiating with
  suppliers or conducting reverse auctions

81
Other E-Procurement Methods (cont.)
82
Other E-Procurement Methods (cont.)

• Purchasing direct goods
• E-purchasing direct goods allows buyers to
• get them faster
• reduce the unit cost
• reduce inventories
• avoid shortages of materials
• expedite their own production processes

83
Other E-Procurement Methods (cont.)

• Electronic bartering
• Bartering exchange An intermediary that links
  parties in a barter a company submits its
  surplus to the exchange and receives points of
  credit, which can be used to buy the items that
  the company needs from other exchange participants

84
Infrastructure for B2B

• Major infrastructures needed for B2B marketplaces
• Telecommunications networks and protocols
• Server(s) for hosting the databases and the
  applications
• Software for various activities for executing the
  sell-side activities, buy-side activities, PRM,
  and building a storefront
• Security for hardware and software

85
Other E-Procurement Methods (cont.)

• Electronic data interchange (EDI) The electronic
  transfer of specially formatted standard business
  documents, such as bills, orders, and
  confirmations sent between business partners

86
Other E-Procurement Methods (cont.)

• Value-added networks (VANs) Private, third-party
  managed networks that add communications services
  and security to existing common carriers used to
  implement traditional EDI systems

87
Other E-Procurement Methods (cont.)
Web-based EDI Services

• Internet-based (Web) EDI EDI that runs on the
  Internet and is widely accessible to most
  companies, including SMEs

88
Other E-Procurement Methods (cont.)

• Integration
• Integration with existing internal infrastructure
  and applications
• EC applications of any kind need to be connected
  to the existing internal information systems
• Integration with business partners
• EC can be integrated more easily with internal
  systems than with external ones

89
Other E-Procurement Methods (cont.)

• The role of standards and XML in B2B integration
• XML (eXtensible Markup Language) Standard (and
  its variants) used to improve compatibility
  between the disparate systems of business
  partners by defining the meaning of data in
  business documents

90
Other E-Procurement Methods (cont.)

• XML can overcome EDI barriers for three reasons
• XML is a flexible language, therefore it expands
  the rigid ranges of EDI
• Message content can be easily read and understood
  by people using standard browsers
• XML-based technologies require less-specialized
  skills

91
Other E-Procurement Methods (cont.)

• Web services An architecture enabling assembly
  of distributed applications from software
  services and tying them together

92
Managerial Issues

1. Can we justify the cost of B2B applications?
2. Which vendor(s) should we select?
3. Which B2B model(s) should we use?
4. Should we restructure our procurement system?

93
Managerial Issues (cont.)

1. What restructuring will be required for the shift
   to e-procurement?
2. What integration would be useful?
3. What are the ethical issues in B2B?
4. Will there be massive disintermediation?

94
Summary

1. The B2B field EC activities between businesses
2. The major B2B models sell-side buy-side trade
   exchanges collaborative commerce
3. The characteristics of sell-side marketplaces
   online direct sale by one seller to many buyers

95
Summary (cont.)

1. Sell-side intermediaries provide value-added
   services to manufacturers and business customers
2. The characteristics of buy-side marketplaces and
   e-procurement expedite purchasing, save on item
   and administrative costs, and gain better control
   over the purchasing process.

96
Summary (cont.)

1. B2B reverse auctions tendering system used by
   buyers to collect bids electronically from
   suppliers
2. B2B aggregation and group purchasing increasing
   the exposure and the bargaining power of
   companies can be done by aggregating either the
   buyers or the sellers.

97
Summary (cont.)

1. Infrastructure and standards in B2B networks and
   protocols, multiple servers, application
   software, and security.
2. Web-based EDI, XML, and Web services
   connectivity of B2B is facilitated by Web
   services.